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Using Funds for Impermissible Purposes

This is the third in a series of class action suits filed by Royal Park Investments (RPI) based on other current lawsuits. The original lawsuits each allege that a certain bank has failed to fulfill its duties as trustees to RPI funds; these secondary suits allege that the defendant banks have been paying their legal fees for the original suits out of the trusts’ funds. The complaint for this class action claims that neither the trusts’ Governing Agreements nor the common law of trusts permits HSBC to use the trusts’ funds for this purpose. As the complaint puts it, “Thus, the investors are being harmed by HSBC twice—first through HSBC’s misconduct as alleged in the Litigation, and second through HSBC’s improper and illegal use of those same damaged investors’ funds to defend itself for its misconduct.”

Royal Park Investments (RPI) hired US Bank National Association as trustee for twenty-one of its residential mortgage-backed securities (RMBS) trusts, but apparently was not satisfied with the bank’s performance. It is suing US Bank in a case called Royal Park Inv. SA/NV v. U.S. Bank Nat’l Ass’n, No. 1:14-cv-02590-VM—but it claims to have recently discovered that the bank has been funding its defense with money from the trusts. Under both the trusts’ Governing Agreements and the common law of trusts, the complaint for this class action says, a trustee like US Bank is not allowed to do this. The trustee is required to administer the trusts for the sole benefit of the certificate holders. The complaint thus alleges that the bank has injured the investors in the trusts twice—first, by breaching the contractual and common-law duties owed to the certificate holders, and second, by defending its misconduct with money that belongs to the certificate holders.

This case is built on top of another case. Royal Park Investments (RPI) sued Well Fargo in Royal Park Investments SA/NV v. Wells Fargo Bank, N.A., No. 1:14-cv-09764-KPF-SN (S.D.N.Y.), claiming that Wells Fargo had failed to fulfill its duties as a trustee of two of RPI’s trusts, allegedly damaging RPI and the classes’ certificate holders. The complaint claims that Wells Fargo has defended itself with wasteful, inappropriate measures, “scorched earth tactics,” and “oppressive discovery.” This was mystifying to RPI, until, the complaint claims, “in early 2017, RPI became aware that Wells Fargo may have been billing the costs of defending the Litigation” to the trusts themselves. According to the complaint, Wells Fargo is not permitted to do this under either the trusts’ governing agreements or the common law of trusts.